Summit on Fannie Mae, Freddie Mac eyes reform

by Kevin G. Hall - Aug. 18, 2010 12:00 AMMcClatchy Newspapers

WASHINGTON - The Obama administration got what it was looking for Tuesday at its summit on the future of housing finance, big ideas that ranged from a government-sponsored refinancing of millions of mortgages to blowing up the structure that's backstopped mortgage lending for decades.

Tuesday's summit, in the Treasury Department's ornate Cash Room, was a starting point for a debate that will unfold in months ahead and carry consequences for all Americans.

How this debate is decided could affect everything from the supply of affordable rental housing to tax deductions for mortgage interest to whether Americans pay significantly more to be homeowners.

The process that began Tuesday also is likely to spell the end, at least in their current form, of mortgage-finance titans Fannie Mae and Freddie Mac, which have been in government conservatorship since September 2008. The mortgage leviathans, which were seized by the government after huge losses from subprime mortgages, have cost U.S. taxpayers nearly $150 billion.

Treasury Secretary Timothy Geithner put down some wide markers Tuesday on what he envisions for mortgage finance.

"We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support," he said in introductory remarks. "We will not support a return to the system where private gains are subsidized by taxpayer losses."

Fannie Mae was created in 1938 to boost homeownership after the Great Depression. Freddie Mac was created in 1970 to provide more competition. The two congressionally chartered private entities buy mortgages originated by lenders and pool them into bonds backed by U.S. mortgages. For decades, this has freed banks and other mortgage lenders from having to retain the loans on their books and allowed them to keep lending to homebuyers.

The administration hasn't said what it will propose to Congress by January. The summit was intended to gather ideas and reaction from those involved in mortgage finance. Those present Tuesday ranged from bankers who underwrite loans to financiers who buy mortgage bonds to consumer advocates who want more affordable rental housing.

The summit began with a bang when Bill Gross, the managing director of PIMCO, the world's largest bond fund, proposed that the Obama administration order Fannie Mae and Freddie Mac to refinance all outstanding mortgages that they back or guarantee into today's historically low interest rates.

Doing so, he reasoned, would free up a significant amount of income for millions of Americans, who then could boost the economy by spending that additional disposable income.

Known as a maverick in financial circles, Gross also declared dead the private sector's secondary market for mortgages, where they're pooled together and sold to investors as bonds. The Obama administration should recognize this, he said, and explicitly guarantee all pools of new mortgages going forward.

Getting the government out of mortgage lending, Gross and others warned, may mean mortgage rates 3 or 4 percentage points higher than they are today.